Macroeconomic benefits of quality infrastructure

One reason for investing in Quality Infrastructure (QI) is its contribution to a country’s economic growth. QI enhances economic performance through several avenues, including opening markets, reducing entry barriers, promoting knowledge transfer and better management procedures, facilitating production along value chains, enabling economies of scale, and reducing adverse selection and asymmetric information (Gonçalves and Peuckert, 2011). While interest in QI has been increasing over the years, QI experts, researchers and practitioners are challenged with quantifying the economic benefits of QI to highlight its importance and justify the need for investment and further development. So far, there have been various studies on the macroeconomic impact of individual QI components, such as standards, metrology and conformity assessment. However, an impact analysis for the entire system is still pending. This blog explores the methodologies used for the macroeconomic impact assessments of the different QI components and the possibility of conducting an assessment of the overall QI system.

Standardization

A proven approach is the study of the macroeconomic effects of standards. In 2000, researchers at the Fraunhofer Institute for Systems and Innovation Research and the Technical University of Berlin developed a method to determine the impact of standards on economic performance and growth. The researchers found that for the period 1961 to 1996, standards and technical regulations were responsible for 1% of Germany’s Gross National Product (GNP) (DIN (2000) found in Blind, Jungmittag and Mangelsdorf (2011)). Blind, Jungmittag and Mangelsdorf (2011) replicated the study using data from 1960 to 2006. They determined that the total economic benefit of standardization for Germany for the period 2002 to 2006 averaged to 16.77 billion euros per year, corresponding to 0.7-0.8% of the country’s Gross Domestic Product (GDP). Similar studies were conducted for Belgium (1994-2018), France (1950-2007), the United Kingdom (UK) (1948-2002), Canada (1981-2004) and Australia (1962-2003). The findings indicated that standards accounted for 0.2-0.3% of the economic growth in Belgium, the UK and Canada; and 0.8% in France and Australia (Blind, Jungmittag and Mangelsdorf, 2011; ISO, 2021).

Each study used a similar methodology, which quantifies the impact of standardization on a national economy based on the Cobb–Douglas production function and allows researchers to establish the contribution to the broader economy. Economic growth is driven by the quantity of labour and capital available and their efficiency. As an economy matures, the output produced by each additional input unit diminishes. Economic growth over the long run can be sustained by improving the efficiency with which these inputs are used, known as Total Factor Productivity (TFP). TFP combines technological knowledge and efficiency to measure how effectively capital and labour can be combined to produce sustained economic growth. Economic growth results from the interaction of these three components (labour, capital and TFP), as seen in Figure 1. 

Increases in TFP are driven by several factors, including advances in technical knowledge, which can be influenced by standards, patents, research and development and other technological progress that enhances the

efficiency of processes and techniques.

A fundamental assumption in the studies mentioned is that standardization activities, as a specific form of technology transfer, play a critical role in promoting technological advancement and the dissemination of technical knowledge and thus can be used as a proxy of TFP. The stock of standards is typically used to measure standardization activity as it provides a consistent, quantifiable way to capture nationwide standardization activities across all industries.

Figure 1: Economic Model of This Study Based on the Cobb–Douglas Production Function

Source: Liao (2021)

Integrating all indicators for all production factors in an econometric model makes it possible to quantify economic growth. The contribution of each factor to economic growth can be determined and helps to calculate a precise economic benefit of the current body of standards.

Metrology

Studies on the macroeconomic impact of metrology typically quote the findings of the standards impact assessments described above since metrology plays an essential role in implementing standards. Nevertheless, several studies have been conducted on the economic effects of metrology. Don Vito (1984) determined that metrological activities comprised 3.5% of the GNP for the United States of America (USA) using proxy models (found in Rodrigues Filho (2017)). Using a mapping measurement impact model, the UK Department of Trade and Industry assessed the economic benefit to various industries of different projects funded by the country’s National Measurement System. The findings reveal total economic benefit measures of approximately £2010 million (in Rodrigues Filho (2017)). 

Temple and Williams (2002) investigated the impact of the measurement activity that provides the infra-technology to facilitate economic activities in the UK. Infra-technologies, such as measurement, test methods, artefacts, standard reference materials, etc. are technologies that provide the technical infrastructure and tools required for further innovation (Temple and Williams, 2002; Robertson and Swanepoel, 2015). The results revealed that the measurement R&D significantly impacted approximately 2% of the country’s GDP.

The methodologies used to quantify the economic impact of measurement include economic modelling, case studies, cost-benefit analysis and interviews (Robertson and Swanepoel, 2015).  Don Vito (1984) used survey data on the percentage of labour costs used for measurement-related activities in each industry sector of the economy of the USA (found in Birch (2003)). In their analysis, value-added was defined as “the value of goods and services sold, less the non-labour costs, plus other items, such as profits and indirect business taxes” (found in Birch (2003)). Since the most significant component of value added comes from labour, Don Vito used this as a proxy for total value added to obtain the value added from measurement-related activities for each sector (found in Birch (2003)). The total value added for each sector was then summed to determine the overall economic impact of measurement.

The approach used by Temple and Williams (2002) estimates the aggregate impact of measurement R&D, which links R&D expenditures to technological improvements, which increases TFP and GDP.

Conformity Assessment

ACCREDIA (2020) investigated the impact of conformity assessment services (certifications, inspections, tests and calibrations) on the Italian economy. They found that conformity assessment positively and significantly affected the Italian economy, with an overall contribution of 16.1% to the country’s growth of value added during 2013-2018 (ACCREDIA, 2020). This is equivalent to a cumulative value of €10.8 billion over the five years, or an average of €2.2 billion. A sectoral breakdown shows that conformity assessment services contribute €5 billion to the manufacturing sector, €5.8 billion to the services sector and €110 million to the construction sector (ACCREDIA, 2020). Further analysis shows that 83% of the total, or approximately €9 billion, was derived from accredited conformity assessment activities (ACCREDIA, 2020).

ACCREDIA (2020) adopted a similar approach to the one used for the standards impact assessments discussed above. However, since their objective was to quantify the role of conformity assessment services in the Italian economy, they included a novel factor – TIC capital (Testing, Inspection and Certification). The TIC capital is a measure of the accumulation over time of the intangible capital representing the stock value of quality, knowledge and technology in the economy that is traceable to conformity assessment activities, which reflects the diffusion according to the sector (ACCREDIA, 2020). It was constructed using the permanent inventory method and includes accredited and non-accredited conformity assessment services. In addition to the traditional factors of production – labour and capital – the variables included constituting value-added, hours worked, the stock of tangible assets for both Information and Communication Technology (ICT) and non-ICT components, and the stock of Research and Development (R&D) capital.

Accreditation

Few studies could be found on the macroeconomic impact of accreditation. A study by NZIER (2017) looked at the role of International Accreditation New Zealand (IANZ), the accreditation body of the Testing Laboratory Registration Council in New Zealand, on the country’s economy using economic modelling. The findings indicate that the absence of IANZ and any other comparable accreditation service provider in New Zealand would result in a 0.63% fall in real GDP, which amounts to $1.65 billion (NZIER, 2017). The study also found that the value of accredited exports would decrease by $4.5 billion and total exports by $2.4 billion. 

Another study by Agarwal et al. (2017) investigated the impact of the National Association of Testing Authorities (NATA) on the Australian economy. NATA is Australia’s national authority for the accreditation of laboratories and producers of reference materials and a peak body for the accreditation of inspection bodies and proficiency testing scheme providers (Agarwal et al., 2017). They found that NATA has contributed between AUD $315 million and AUD $421 million to Australia’s economy.

NZIER (2017) used a Computable General Equilibrium (CGE) model of New Zealand’s economy to investigate how the country’s economy would be affected if IANZ did not exist and there were no alternative accreditation service providers. A survey of UK firms found that accredited products receive an average 8% price premium over unaccredited products (NZIER, 2017). Since no such survey exists in New Zealand, the researchers assumed an 8% accreditation price premium was also relevant to the country. The researchers compared the economy after removing the 8% accreditation price premium, the proxy for the absence of IANZ, with the business-as-usual scenario for 2016 (NZIER, 2017).

The economic model used by Agarwal et al. (2017) explains accreditation as a derived benefit to the economy. It defines the consumer’s utility function as comprising a level of satisfaction derived from the consumption of a given bundle of goods and services with the knowledge that a select proportion of this bundle is derived from an accredited service provider. Accreditation gives the consumer greater confidence in the quality of the good or service compared to alternatives from non-accredited providers. A consumer’s utility function is increasing and concave concerning consumption and the volume of accredited services.

The concept of surplus or efficiency (both in consumption and production) can be used to calibrate the economic impact of accreditation versus the impact of non-accreditation. This is illustrated in Figure 2, which presents the two scenarios where the consumption bundle, demand and marginal cost of production of products and services are given by q1, D1 and Sum MC1 respectively in the scenario without accreditation and q2, DA and Sum MCA respectively in the scenario with accreditation. Area B shows the increase in the consumer’s willingness to pay the price premium for accredited products. Area A shows the additional benefits from accredited products and services accruing to the consumer. This includes productive efficiency, which decreases an organization’s average and marginal cost of production. The increase in efficiency can lower the competitive market equilibrium price. Assuming the accredited market price premium does not change such that the gain from productive efficiency results in higher profit markets, the additional gain (bounded by consumption bundle q2) is seen in Area C.

Figure 2: Economic Value of Accreditation. Source: Agarwal et al. (2017)

Conclusion and Outlook

Quantifying the macroeconomic impact of QI is a crucial factor in improving the positioning of QI and promoting its importance for economic growth. It is also necessary to justify to stakeholders the need for further investment in QI development. While studies have been conducted on the macroeconomic impact of individual components, until now, an assessment of the overall system is yet to be undertaken. Nevertheless, it is worth noting that the highly interconnected nature of the different QI elements makes it difficult to isolate the impact of one from the others completely. For instance, metrology is manifested through standards and applied through conformity assessment and accreditation.

The methodological approaches used for the impact assessments of the individual QI elements provide a solid foundation for undertaking a macroeconomic impact assessment of the entire system. For instance, developing an economic model based on the Cobb–Douglas production function or using a CGE model to compare a scenario with a functioning QI system to a scenario without one.

Regardless of the methodological approach selected, two challenges lie ahead with this endeavour. One is conceptualising a measure for the overall system. Different units of measurement were used as proxies for the individual QI components. For instance, the stock of standards was used as a measure of standardisation, the price premium on accredited products and services was used as a measure of accreditation, and metrology was measured by the value added from labour in measurement activities. Another potential challenge could be data availability, as relatively little data is available on QI. The macroeconomic impact studies have focused mainly on developed countries with leading economies and advanced QI systems. Data is often more readily available for these countries. This is usually different for developing countries with emerging economies. These countries could benefit from macroeconomic impact assessments to highlight the importance of QI to their economies and stimulate both interest and investment. Therefore, it is in the interest of the national economic and statistical authorities in developing countries to collect data systematically and curate databases to allow for such studies.

References

ACCREDIA (2020) Accreditation and certifications. Economic value and social benefits. 1. Rome: ACCREDIA.

Agarwal, R. et al. (2017) Economic Value of NATA Accreditation to Australia. Australia: University of Technology Sydney.

Birch, J. (2003) Benefit of Legal Metrology for the Economy and Society. Australia: International Committee of Legal Metrology.

Blind, K., Jungmittag, A. and Mangelsdorf, A. (2011) ‘The economic benefits of standardization’, DIN German Institute for Standardization [Preprint]

Gonçalves, J. and Peuckert, J. (2011) Measuring the Impacts of Quality Infrastructure: Impact Theory, Empirics and Study Design. Guide No. 7/2011. PTB; TU Berlin

ISO (2021) Standards & economic growth: ISO members’ research on the impact of standards on their national economies. Geneva: ISO.

Liao, D. (2021) Every Standard Counts – How Standardization Boosts the Canadian Economy. Ottawa: Standards Council of Canada

NZIER (2017) IANZ: the economic side: Examining the way IANZ supports the New Zealand economy. Wellington, New Zealand

Robertson, K. and Swanepoel, J.A. (2015) The Economics of Metrology. Research Paper 6/2015. Australia

Rodrigues Filho, B. (2017) ‘Measuring the benefits of legal metrology to place it in the National Quality Infrastructure’, OIML Bulletin, LVIII, pp. 19–21

Temple, P. and Williams, G. (2002) ‘Infra-technology and economic performance: evidence from the United Kingdom measurement infrastructure’, Information Economics and Policy, 14(4), pp. 435–452